Markets plumb new depths

THE end of the world is nigh. So stock markets seem to be telling us, as they head back determinedly toward their lowest levels since John Major was Prime Minister.

London's 120-point fall brought it below its previous closing low. The next milestone (or should it be millstone?) is the 3625.9 touched during trading hours on July 24.

The good news is that trading was relatively calm. After Friday's frenzy, that was welcome. The bad news is that it is still hard to see any relief for battered investors.

Short-term, insurers are being hammered on fears that they will be forced sellers of equities, so that the fall of markets feeds on itself.

Banks are being hit because they may have to prop up their insurance offshoots and their loan books look more vulnerable by the day. Beyond the banks and insurers' woes, two big fears weigh on markets. One is war and its consequencesand the other is that the world economy is heading into a 'double dip' downturn.

It is impossible to measure the risks of a conflict in Iraq, but this week's IMF meeting in Washington should bring some clues about the state of the economic recovery.

On the face of it, the US economy is still growing, with ultra-low interest rates keeping consumer spending firm.

The Federal Reserve seems unlikely to change that at its meeting tonight and might, if anything, take rates below the present 1.75%.

The power bloc closest to us - the eurozone - is giving more cause for concern. German Chancellor Gerhard Schroder may have been reelected by the skin of his teeth, but it is not the old Wirtschaftswunder (economic miracle) that got him there. Anything but.

Germany, once the powerhouse of Europe, may grow at just 0.4% this year after 0.7% in 2001, HSBC economists forecast.

That drags down the growth of the eurozone to 0.8% - half the likely UK figure. Over summer, HSBC thinks the zone 'ground to a virtual standstill'.

In that regard, the European Central Bank's preoccupation with inflation, rather than growth, makes many believe it is shooting at the wrong target. Its chief economist Otmar Issing says that interest rates are 'appropriate', although the barely crawling euroland economy could do with a cut.

The ECB's problem is that inflation, by its conservative standards, is high at 2.1%. Much of this is due to oil prices, which are outside Europe's control. In fact, the ECB's restrictive charter and high oil prices make a witch's brew potent enough to keep its economy in a stupor for a long time.

So far, the markets' fall has been largely ignored by policymakers. The Financial Services Authority helped in summer by easing the rules that would have forced insurers to sell shares. Since then it will only say that it is 'monitoring the situation', though the stresses on insurers have got worse.

Nor do Labour ministers seem inclined to take an interest. But although some of the market's woes are self-inflicted, it remains an important indicator of confidence, or lack of it.

Is there any hopeful sign? Paradoxically there is one: the absence of false optimism. Too often in the last two years, each sharp fall in shares was greeted immediately and over-enthusiastically as a 'buying opportunity'.

Now even the diehard optimists are cowering behind what remains of their portfolios. Veterans of earlier bear markets say that such general gloom is one of the conditions for a rally. Alas, it is not the only one.

Whiff of sulphur

ENRON is effectively dead, but not by any means buried. The spectre of past involvement in its 'special purpose vehicles' is coming back to haunt banks, including Barclays and its Barclays Capital investment arm.

Some transactions coming to light in US court reports, such as Enron's £108m sale of 'sulphur dioxide emission credits', may be perfectly comprehensible to investment banking whizz kids.

But Enron creditors are going over them with a fine toothcomb.

It has already emerged that Chewco, founded to buy assets from Enron and move them off its balance sheet, was set up with a £150m loan from Barclays in 1997.

Barclays believes it handled its Enron transactions properly. It has already been named in a massive US class action. Its lawyers may be busy for a long time.